(Read more on the debt and equity markets and the multifamily market .)
SAN FRANCISCO-Locally headquartered Carmel Partners Inc. has completed the equity raise for its third discretionary institutional real estate investment fund, Carmel Partners Investment Fund III. Carmel's stable of well-known endowments and foundations committed $700 million to the fund, which like its predecessors is focused on multifamily assets with value-add opportunities in supply constrained markets with high barriers to entry.
Carmel has given itself four years to invest the equity from its newest fund, one more year than is typical. “When we went out in the early summer [to raise the equity], we thought–accurately, as it turned out–that there we might see a period of illiquidity [due to turmoil in the financial markets],” Carmel managing partner John Williams tells GlobeSt.com. “So we told investors there may be a period where we might not do anything if there is a gap between bid and ask, and there is; buyer's think there should be a shift in cap rates and sellers don't necessarily believe that.”
As with Carmel's prior funds the goal is to produce a net IRR to investors in the mid-teens. Carmel's inaugural fund, it appears, will produce an IRR of close to 30% upon liquidation, Williams says, thanks in part to some very successful condominium conversions. As things currently stand, investors have received back 100% of the $215 million they committed and the fund still owns 60% of the assets it acquired. Fund II, which attracted $400 million of equity in 2005, owns 4,900 units in 20 properties in six markets and is 85% invested, he says.
Although it's possible, Williams says investors should not expect the results of Fund I will be reproduced in Fund II or Fund III, especially since the condo conversion craze is waning. “Eventually you get a regression to the mean,” says Williams, referring to the theory that extraordinary results at one point in time will, for purely statistical reasons, be less extraordinary the next time around. “If you anticipate mid-teens, eventually you will get there.”
The geographic focus for the third fund will be generally the same as the previous funds in that it will focus on value-add multifamily product on the East and West coasts. That having been said, Williams says the third fund may enter a new East Coast market or two, such as New Jersey and Boston, to complement the first two funds' significant holdings in the Washington, DC area. The first two funds committed about 20% of their equity to development, and the third fund has the same target, Williams says.
The fund's sweet spot in terms of deal value is between $20 million and $70 million. Williams says the company focuses on that range because comparable funds tend to target larger, more expensive deals, which often makes Carmel one of the larger fish in the smaller pond.
“We've had a lot of success in that range because we often come up against less sophisticated operators who don't have ready capital to shop equity and debt,” Williams says. “We find ourselves much more competitive in that sector.”
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